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Scaling up Partial Risk Guarantees:

Guarantee Facilities

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The rationale for guarantee facilities

Need to address small- and medium-size project needs

Promote PRGs on a larger scale

Work in partnership with local institutions

Make economies of scale on project preparation

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A few examples….

In ECA…. The Russia Coal and Forestry guarantee facility

In Africa… The BOAD Guarantee facility

In LAC… The Peru Infrastructure Guarantee Facility

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Objectives of the BOAD Guarantee Facility

Stimulate private investments in medium-sized infrastructure by mitigating government performance risks in WAEMU member countries

Help to catalyze debt with extended maturities and lower financing costs.

Increase the institutional capacity of BOAD in project finance and risk assessment of private infrastructure projects

Leverage the activities of IDA, MIGA and AFD in West Africa

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The BOAD Facility proposes several instruments…

Partial Risk Guarantee (IDA and AFD)

Political Risk Guarantee (MIGA)

Comprehensive Risk Guarantee (AFD)

The Facility size: IDA : US$ 70 million MIGA : US$ 70 million

AFD : Euros 70 million (US$87 M)

These products are offered individually or in complement of one another by each Guarantor

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MIGA(VP Approval)

Country Government(s)

World Bank(RVP Approval)

Commercial Banks

Construction Contractor

BOADIntermediary for retailing PRGs and MIGA

insuranceGuarantee

AgreementProject Agreement

- Equity- Shareholders loans

Commercial Debt, L/C

O&M Contractor

Government Support

Agreement

EPC ContractO & M Contract Equity

Investor

Guarantee Framework

Agreement (GFA)

Sub Project Company

MIGA(VP Approval)

Country Government(s)

World Bank(RVP Approval)

Commercial Banks

Construction Contractor

BOADIntermediary for retailing PRGs and MIGA

insuranceGuarantee

AgreementProject Agreement

- Equity- Shareholders loans

Commercial Debt, L/C

O&M Contractor

Government Support

Agreement

EPC ContractO & M Contract Equity

Investor

Guarantee Framework

Agreement (GFA)

Sub Project Company

Structure of the Guarantee Facility

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Why BOAD as an intermediary?

• Demonstrated experience in project preparation and evaluation

• Presence in each of the eight WAEMU countries

• BOAD ’s strong relationship with the Bank Group

BOAD will play a central role in the project

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BOAD’s role as an intermediary

BOAD will perform the following tasks:– Marketing, – Identification of projects,– Screening sub-projects for consistency with CASs and PRSPs,– Assisting in the processing of the preliminary applications, – Ensuring the subprojects meet the financial, legal, social assessment and environmental requirements codified in the Guarantee Facility Guidebook.

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IDA, MIGA and AfD: the Guarantors’ role

Technical Assistance for the implementation of the Guarantee Facility

Review of compliance with the Agreements, guidelines and policies approved by the Guarantors

Liaising with BOAD and timely response to inquiries

Assisting BOAD to build the pipeline for the Facility by referring eligible projects received by the Guarantors

Project processing and negotiation of Guarantee Agreements

Monitoring and supervision

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Implementation Arrangements and principles of Deployment

• The Guarantee Facility would be deployed as per the agreed principles of deployment of the Bank Group risk mitigation instruments matrix:– The IDA PRG for riskier sectors/transactions, in early reforming

sectors, or for larger transactions.

• Each of the sub-projects would be approved by:– Regional Vice President, Africa for IDA Guarantees– Executive Vice President, MIGA for MIGA Guarantees– “Conseil de Surveillance” de l’AfD for AfD Guarantees

• Projects would be selected on first-come, first-served basis.

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Guarantee coverage applies only to debt instruments for IDA and AfD and to debt and equity instruments for MIGA

Terms and Conditions of the Guarantee Facility (1)

Sub-projects must be in the infrastructure sector unless otherwise agreed by the Guarantors Sub-Project would be consistent with the host country IDA CAS/PRSP or any equivalent country strategy

The total cost of a Sub-Project is limited to US$50 million unless the Guarantors agree otherwise

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Terms and Conditions of the Guarantee Facility (2)

The cumulative amount of guarantees is limited to US$30 million for any project, and the maximum coverage to be provided by each Guarantor is limited to US$15 million

The Sub-project must be in compliance with applicable social and environmental safeguard policies

Maturity of the underlying debt financing is at least 7 years

A Counter-Guarantee must be provided by the Host Government for IDA and AFD Partial Risk Guarantees

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How does it work ? (1)

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How does it work ? (2)

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Large investment needs in all infrastructure sectors (US$18bn in total, of which US$12bn in provinces);A pipeline of 16 investment projects are to be implemented over the next 5 years in the water, transport, energy and telecom sectors;All projects are economically desirable but most are financially non sustainable without government contribution (all are regional/local projects);Hence, projects will be developed under Public-Private Partnership arrangements, with direct government contributions;Context of political uncertainties in Peru (presidential elections in 2006).

The Peru Guarantee Facility

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Investors’ and lenders’ appetite

Without adequate protection against government exposure:

Local rating agency would rate projects below investment grade;International project sponsors and institutional investors would not invest in Peru in non-viable projects;International and domestic commercial banks would only lend with short maturities (3-5 years) and in limited amounts ($20 million max.);;

Domestic pension funds, although overly liquid, could not invest in the projects (insufficient rating) and would not take additional exposure to the sovereign.

Hence, clear need to provide credit enhancement and to shift exposure to low risk non-sovereign third parties

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Project will establish Guarantee Facility in Peru

A facility, established in Peru’s private sector promotion agency, entitled to appraise projects on behalf of the WB and recommend them for guarantee coverage;

Available on a fast-track basis from the WB (no board approval) as Peru’s infrastructure projects are awarded to private investors;

Overall guarantee envelop set at US$200mm, but facility can be replenished.

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Impact on project financing

Credit enhancement, leading to rating improved by several notches;With such rating, the pension funds would be able to invest in the projects;While they currently invest in infrastructure projects with a maturity of maximum 10 years, they would be willing to invest, depending on project characteristics, with a horizon of up to 20 years;Commercial banks would be willing to extend tenors to up to 12 years and decrease bank loan interest rates for infrastructure project debt by around 300 basis points (subject to project evaluation).

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Expected economic benefits

Participation of larger number of bidders to concession;Access to a broader range of financial investors, more financing, with better conditions and better suited to projects’ characteristics;Lower cost for the government (lower project financing costs and increased bidding competition) and lower tariffs for consumers;Pension fund portfolios’ diversification from sovereign risk without increasing risk;Development of local capital market by extending tenors.Hence, higher probability of success of PPP program

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Putting into place Guarantee facilities

1. Government & Bank dialogue

2. Government identifies potential projects / competitive bids

3. Government – Bank discussion to identify intermediary and modus operandi

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The limits of guarantee facilities

Need for a strong project pipeline

Reliability of intermediary institution

Limitations on due diligence delegation – especially for environmental & social issues

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Séverine Dinghem, Sr.Financial OfficerThe World Bank

1818 H Street, NWWashington, DC 20433 (USA)

Ph: +1 (202) 458-0169Fax: +1 (202) 522-0761

Email: sdinghem@worldbank.org

or visit our web site: www.worldbank.org/guarantees

For further information contact: